The Zacks Rank #3 (Hold) company reported earnings of 71 cents
per share in first-quarter fiscal 2014 which beat the Zacks
Consensus Estimate of 69 cents.

However, earnings included a gain of 2 cents from a litigation
credit. Excluding the benefit, adjusted earnings were 69 cents,
in line with management's expectations (67 cents- 69 cents) and
grew 21.5% year over year driven by solid margin expansion.

Revenues and Comps

Total sales for the first quarter were $4.24 billion, missing
the Zacks Consensus Estimate of $4.30 billion. We believe the
top-line miss resulted from modest comps shortfall in the U.S. as
more consumers opted for online shopping this holiday season.

Nevertheless, revenues increased 12% year over year driven by
new store openings, strong comps in China/Asia Pacific and Europe
and successful food and beverage innovations.

Same-store sales, which exclude the impact of the
company-operated stores opened in the past 13 months, grew 5%,
driven by 4% increase in global traffic. Comps, however, slowed
down from the past two quarters - fourth and third quarters of
fiscal 2013.

In the quarter, the company saw a major shift in consumer
shopping behavior from store purchases to online purchases.

Though comps slowed down slightly in the first quarter due to
lower in-store foot traffic, Starbucks claimed that the quarterly
results do not reflect the significant future sales benefit from
the new Starbucks gift card activations and Starbucks card
reloads in the quarter. Also, Starbucks chief executive officer,
Howard Schultz, said that consumers preferred to gift shopping
cards instead of a particular item this holiday season. Dollars
loaded on the loyalty cards increased an impressive 24% to $1.4
billion in the quarter, suggesting that millions of customers
will be visiting Starbucks stores in future quarters thereby
boosting the top line. Also, the company processed more than 40
million new Starbucks card activations, valued at over $610
million in the U.S. and Canada alone in the first quarter.

Schultz believes that Starbucks' strong digital, card, loyalty
and mobile capabilities make it one of the very few retailers to
benefit from this shift in consumer shopping behavior. The
quarter-end deferred revenues rose 29% year over year to over $1
billion due to the rapid pace of Starbucks card loads in the
quarter.

Strong Margins

Adjusted operating margin increased 260 basis points (bps) to
19.2% driven by strong sales leverage, store efficiency, lower
coffee costs and easier year-ago comparisons. Last year, the
company incurred costs related to its leadership conference,
litigation charges and the impact from Superstorm Sandy which
were absent in the first quarter of this year. Strong margin
growth in all segments drove profits in the quarter.

Segment Details

Americas:
Net revenue in this flagship segment rose 8% over the prior-year
quarter to $3.07 billion, attributable to 5% growth in same-store
sales. However, comps were slightly lower than the past 2-3
quarters due to the shift in consumer shopping behavior and
softening of traffic and comp growth in Dec 2013. Unfavorable
weather conditions in December have pressured traffic across the
broader retail sector.

Europe, Middle East and Africa (EMEA):
Net revenue increased 11% year over year to $339.5 million in the
quarter driven by solid comps and store openings. Comps grew 5%
in the quarter representing the strongest growth in three years.
Increased consumer traffic at the stores due to food/ beverage
innovation and growth in the number of licensed stores drove
comps in the quarter.

China-Asia-Pacific (CAP):
Net revenue grew 25% to $266.9 million in the quarter driven by
8% increase in same-store sales and the rapid pace of store
openings. Also, strong brand awareness, innovative product
offerings and increased use of Starbucks loyalty cards pulled up
the top line.

Net revenue grew 7% year over year to $401.0 million in the
fourth quarter driven by strong performances of Starbucks/Tazo
branded K-Cup portion packs and strong foodservice sales which
offset headwinds from lower pricing on packed coffee. Verismo
at-home coffee machine also saw solid holiday sales.

Though fiscal 2013 was slower, CPG revenues and profits are
expected to accelerate in double digits in fiscal 2014 driven by
volume growth from recent price reduction, innovation,
international expansion and an accelerated agreement with partner
Green Mountain Coffee Roasters, Inc.
(
GMCR
). Under the new five-year agreement, Starbucks has tripled the
number of its products that it supplies to be run on Green
Mountain's Keurig brewers.

All-Other
: The All-Other segment comprises emerging brands including
Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution
Fresh and Digital Ventures. Revenues in the segment grew to
$159.2 million, growing 174% year over year, due to the inclusion
of sales from Teavana retail stores which were absent last
quarter. Teavana performed strongly in the quarter.

Payment of Kraft Litigation Charge

In the quarter, the company paid its dues to Kraft Foods, Inc.
against settlement of the year-long distribution agreement
dispute. The indemnity was paid to
Mondelez International, Inc.
(
MDLZ
) which emerged when Kraft Foods was split into two separate
companies, Mondelez and
Kraft Foods Group, Inc
(
KRFT
) in Oct 2012. This led to the issuance of $750 million of debt
in Dec 2013, which brought the total long-term debt for Starbucks
at just over $2 billion.

Fiscal 2014 Earnings Outlook Increased

The fiscal 2014adjusted earnings guidance was raised from a
range of $2.55-$2.65 per share to $2.59-$2.67 per share to
account for the first quarter beat. Excluding non-routine gains
and the Kraft litigation charge, this represents 18%-22% growth
over fiscal 2013 levels. The earnings growth will, however, be
second-half weighted growing approximately 20% in the period.

However, the company continues to expect revenues to grow 10%
or higher. Comps are still expected to grow in the mid
single-digit range. In addition to food/beverage innovations,
loyalty program and single-serve products, we believe La Boulange
bakery items, Evolution Fresh juices and Teavana tea could emerge
as meaningful top-line growth drivers in fiscal 2014.

Operating margin (excluding the litigation charge associated
with the Kraft arbitration) is still expected to expand
approximately 150 bps-200 bps year over year driven by higher
revenues and lower coffee costs. Earnings are expected in the
range of 54 cents-55 cents in the second quarter and 64 cents -
66 cents in the third.

Lower coffee costs are expected to benefit earnings in the
range of 9 cents- 10 cents per share in the year which will
be partially offset by the pricing actions for packaged coffee.
In addition, the company expects incremental interest expense
(due to $750 million in additional long-term debt issued in Sep
2013) and higher tax rate in the year compared to fiscal 2013.
Tax rate is expected to be approximately 34.5% in the year,
higher than 2013 levels.

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